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Insurers Worry About Move To Put Estate Tax Section In Pension Bill

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Efforts by the Senate Republican leadership to slip estate tax reform into the pending pension reform bill have life industry groups concerned that the political weight could sink the entire ship.

Industry group officials and company executives are eager for passage of the defined benefit pension overhaul bill because the bill includes provisions that could create opportunities for insurers to sell a whole array of new products.

Timing is critical, because pressure is mounting on Congress to act on the pension reform bill and accompanying legislation before June 28, when Congress plans to leave for the July 4 recess.

“With the full support of House and Senate leadership to resolve the remaining differences in the pension legislation, we are optimistic that agreements can be reached on all key issues prior to the July 4 recess,” says Kenneth Cohen, deputy general counsel at Massachusetts Mutual Life Insurance Company, Springfield, Mass.

“Pension issues have taken months to resolve,” Cohen says. “Adding additional controversial issues to the package could kill the chances for enactment this year.”

The American Council of Life Insurers, Washington, believes it is “unlikely” that estate tax reform would be added to the pension bill, ACLI spokesman Jack Dolan says.

“We strongly support the pension bill,” Dolan says. “It has a variety of provisions that would boost Americans’ retirement security. We hope the conference concludes soon so that the measure can be enacted into law quickly.”

Although adding estate tax reform “is possible,” there are significant factors mitigating against such an approach, according to David Stertzer, chief executive of the Association for Advanced Life Underwriting, Falls Church, Va.

“Conference reports are not amendable, and this would be a circuitous way to move estate tax reform forward without providing opportunity for consideration of alternatives on the Senate floor,” Stertzer says.

Another concern is the Republican estate tax compromise proposal would cost about 90% as much as full estate tax repeal.

Stertzer says the AALU supports “reasonable and sustainable estate tax reform that would exempt the vast majority of Americans from estate tax liability while allowing the remaining few subject to the tax to plan with certainty.”

Senate Republican interest in adding an estate tax reform proposal to the pension benefit reform bill surfaced June 8, after estate tax repeal supporters failed to pass a measure that would have limited debate on the repeal bill. The Republicans came up three votes short of the 60 needed to limit debate on full repeal.

The pension bill, H.R. 2830, is being drafted by a conference committee seeking to reconcile different House and Senate versions.

Besides a provision that would revamp the defined benefit system, the bill could include a number of other provisions of interest to life insurers.

Some of the provisions that have appeared in the House version of the bill, the Senate version or both would:

–Extend expiring tax cuts.

–Encourage employers to include all employees in 401(k) plans by default, rather than requiring employees to take active steps to join the plans.

–Clarify the tax treatment of corporate-owned life insurance and codify best practices for the sale of COLI products.

–Create a safe harbor from fiduciary liability for plan sponsors that offer retirement plan members investment advice from independent investment advisors.

–Allow cash buildups in life insurance and annuity contracts to be used to fund long term care costs or to pay LTC insurance premiums.

Sen. Charles Grassley, R-Iowa, a member of the pension bill conference committee, has said that efforts to reform pension rules and the estate tax may eventually be joined, though he noted that Senate Republican leaders are trying to find ways to avoid that.

Attaching an estate tax measure to the pension conference report “would let people know there’s got to be a vote,” Grassley said.

Sen. Max Baucus, D-Mont., the most senior Democrat on the Senate Finance Committee and the lead Democratic negotiator on the estate tax reform issue, said June 14 that the environment for reaching an agreement has not improved since June 8.

“So far [things are] no better,” Baucus said.

But Senate Republicans such as Sen. Trent Lott, R-Miss., are trying to force the issue.

Lott is the primary advocate for attaching estate tax reform to the pension bill. He said June 13 that he does not think a deal can emerge in the Senate, and so he would rather use the conference report as the vehicle for reducing the estate tax. He said he was “not all that excited” about the proposals being considered since the vote, and he said he would not vote for a proposal that imposed a rate higher than 30% on any estate.

The Republican compromise proposal calls for a $5 million per person exemption and a 15% rate, with a 30% rate on estates over $30 million per person.

The Democratic negotiating position appears to adopt the estate tax treatment under present law for 2009, which features a $3.5 million-per-spouse exemption and a 45% maximum tax rate.

The exemption for 2006 is $2 million per person, and the maximum tax rate is 46%.

Under present law, the exemption gradually rises until full repeal arrives in 2010. But, unless the law is renewed, the tax would revert to 2001 levels, with a $1 million exemption per spouse and a maximum 55% tax rate.

The insurance industry is coalescing around legislation that would establish a $2.5 million-per-person exemption and a 45% maximum tax rate.


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